Buying, Owning, and Selling a Home
BUYING, OWNING, AND SELLING A HOME
The purchase of one’s own home represents
both a lifetime goal for most Canadians as
well as the largest single purchase and biggest
financial commitment that most of us will ever
make. It’s also, for many, a significant part of
their overall financial and retirement planning.
All in all, there’s a lot of money and many
expectations tied up in this single asset.
Generally speaking, the Canadian tax system is
designed to encourage and facilitate home ownership by Canadians. That’s done through tax
“breaks” making it easier to save for the initial
down payment, a credit provided to first-time
homebuyers, and finally, preferential tax treatment
received when the family home is eventually sold.
What follows is an outline of many of the rules
which can affect homeowners and would-be
homeowners under our tax system.
Getting into the market—buying
your first house
Coming up with the downpayment
Trying to save enough to make a down payment
on a house while still covering one’s current
living costs poses a significant obstacle for many
Canadians who want to get into the housing
market. The federal government provides a
couple of programs to allow would-be homebuyers to save on a tax-assisted basis.
The first of those programs is the Home Buyers’
Plan (HBP), which allows taxpayers to withdraw funds, on a tax-free basis, from their reg-
istered retirement savings plans (RRSPs) to use
for a down payment on a first home. The funds
so withdrawn must be repaid to the RRSP over
the next 15 years.
As with all things tax-related, there are caveats
and conditions involved. In order to participate
in the HBP, the taxpayer must be a first-time
home buyer. For purposes of the HBP, “firsttime buyer” means that the neither the home
purchaser nor his or her spouse have owned a
home within the previous four years. It’s still
possible, therefore, where someone sells a home
and doesn’t purchase another for a period of at
least four years, for that person to qualify as a
“first-time buyer” for purposes of the HBP with
respect to their next home purchase.
There are, as well, limits set on the amount
which can be withdrawn from an RRSP under
the HBP program. Until January 27, 2009, that
limit was $20,000. However, the amount of a
permitted withdrawal was increased in the 2009
federal budget to $25,000, effective for home
purchases made after the budget date of January 27, 2009. Where funds are withdrawn from
an RRSP as part of the HBP, there is no tax
withheld from the withdrawal—in other words,
where $25,000 is withdrawn, the taxpayer will
receive the full amount. Such a withdrawal can
be made in one lump sum or as a series of withdrawals, with the only restrictions being that all
withdrawals made for the purpose of the HBP
must be made during the year, or in January
of the following year, and that the home must
be purchased or built before October 1 of the
year which follows the year of withdrawal. And,
finally, where the first-time home buyers are
spouses (keeping in mind that both must separately qualify as first-time home buyers) each
spouse may withdraw up to $25,000 from his or
her RRSP for HBP purposes, meaning that the
total possible withdrawal is $50,000.
Of course, no matter how much or how little
is withdrawn, all such funds must be repaid
to the RRSP. The first repayment is due the
second year following the year in which the
withdrawal was made. Generally, for each year
of the repayment period, 1/15th of the withdrawal amount must be repaid. The Canada
Revenue Agency (CRA) sends taxpayers who
have participated in the HBP a statement of
account each year, included with the Notice of
Assessment received with respect to that year’s
tax return. The statement will include:
• the amount the taxpayer has repaid
(including any additional voluntary payments);
• the taxpayer’s HBP balance; and
• the amount of the next repayment the
taxpayer must make.
Where a taxpayer fails to make a required repayment under the HBP, the amount of that payment is treated as an RRSP withdrawal and is
added to the taxpayer’s income for the year. The
amount is then taxed in the same manner as any
other RRSP withdrawal.
The second federal program which allows taxpayers to save for a down payment on a tax-assisted
basis is the tax-free savings account (TFSA), also
introduced as part of the 2009 federal budget. While the TFSA program was not created
specifically for the purpose of saving for home
ownership, many of its features lend itself to that
purpose. Under the TFSA rules, any Canadian
resident 18 years of age or older can contribute up
to $5,500 per year to a TFSA (prior to 2013, the
limit was $5,000, and in 2015 it was $10,000).
While no deduction is allowed for the TFSA
contribution, any investment income earned
within the plan is not taxed and any amount can
be withdrawn from the TFSA at any time and
used for any purpose, with no tax payable on the
withdrawn amount. And, unlike the HBP withdrawals, there is no requirement that withdrawals
made from a TFSA must be repaid to the plan.
Where a taxpayer and his or her spouse each
use a TFSA to put money aside for a down
payment, the total possible savings, not including any tax-free investment income earned on
those savings, could amount to $55,000 over a
five-year period ($5,500 per taxpayer × 5 years
= $27,500). And, since TFSA amounts are
withdrawn free of tax, the full $55,000 would
be available to use as a down payment.
Qualifying for mortgage financing
For all but a very fortunate few, buying a
home means taking out a mortgage. As well,
taking on a mortgage means qualifying for
that mortgage under the Canadian mortgage
lending rules. By and large, those rules are
fairly stringent, certainly by comparison to the
standards applied in recent years in the United
States. As well, the Canadian government,
mindful of the role that mortgage defaults
played in the financial crisis which began in
the U.S. in the fall of 2007, has twice made
changes since that time to impose even more
stringent requirements on Canadian borrowers. Note that these and other rules regarding
mortgage financing apply only to mortgages
arranged through Canadian financial institutions. Where a homebuyer can obtain private
mortgage financing (for instance, from parents
or other family members), the allowable terms
and conditions are simply those which can be
negotiated between the parties.
In order to make sense of the recent changes
made by the federal government, some background is required. Where a home purchase
is to be made and the down payment is less
than 20 percent of the purchase price, a commercial lender will require that the purchaser
obtain mortgage insurance through a federal
agency—the Canada Mortgage and Housing
Corporation (CMHC). A fee is paid by the
borrower for such insurance, under which the
lender is protected by the federal government
against any failure by the borrower to repay the
mortgage according to its terms.
While Canadian mortgage financing requirements
have always been fairly conservative, the federal
government felt that what it called “financial innovations” in the mortgage market were increasing the
risk of a U.S.-style housing bubble. Accordingly, the
federal government moved, in the fall of 2008, the
spring of 2010, and again in the summer of 2012,
to tighten the lending requirements which are imposed on such government-insured mortgages.
As a result of those changes, any new home
purchasers in Canada who will be taking out a
CMHC-insured mortgage must provide a minimum down payment of 5% or 10% (depending
on the type of house being purchased) of the purchase price. In addition, the maximum amortization period (the period over which the mortgage
must be repaid) is limited to 25 years. Finally,
the new rules set minimum requirements with
respect to a borrower’s credit history and current
financial obligations. Specifically, they required
that any new borrower on a CMHC-backed
mortgage have a credit score of at least 620 (out
of a possible 900) and that the total amount
needed to pay all debt service and housing-related
fixed or essential payments (which would generally include mortgage payments, property taxes
and heating costs) is no more than 44% of the
borrower’s gross income for the year.
Tax credits for first-time home buyers
Would-be buyers who manage to put together
the required down payment and qualify for
mortgage financing can obtain a tax “break”
during their first year of home ownership,
in the form of the refundable tax credit for
first-time home buyers. That credit, which is
claimed on the taxpayer’s income tax return
for the year, is $750. While such an amount
is relatively small in relation to the overall
cost of acquiring a home, it would in many
cases be sufficient to cover at least part of
the closing costs (like legal fees) and new
homeowner costs (like window coverings and
maintenance costs) which often catch firsttime home buyers by surprise.
Living in your house—tax rules
applied to home ownership
Moving expense deduction
Buying and moving into your first (or subsequent) home doesn’t automatically make
moving expenses deductible. Rather, the
deductibility of moving expenses is determined
by whether the move brings one closer to one’s
place of work. The rule, in all cases, is that
moving expenses will be deductible where the
new home is at least 40 kilometres closer to
the taxpayer’s place of work. If that criterion is
met, then a number of moving-related expenses
can be deducted from employment or business
income earned at the new location. The CRA
issues a very useful fact sheet detailing the types
of costs which may or may not be deducted
under the moving expense deduction, and that
fact sheet is available on the CRA Web site at
www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-15e.pdf.
Deducting home ownership costs
First-time home buyers are almost always surprised at the never-ending stream of bills that accompany home ownership. Unfortunately, virtually none of those costs are deductible for income
tax purposes, except in the limited circumstances
associated with having a home office.
Homeowners often wish, in particular, that the
interest cost associated with paying the mortgage could qualify for some tax relief. However
(again, except in the limited circumstances
outlined below), mortgage interest paid on an
owner-occupied home is not and has never
been deductible for Canadian tax purposes.
Home office expense deduction
The one instance in which costs associated
with the running of an owner-occupied home
can be deducted for tax purposes is where the
homeowner has a home office (or in tax parlance, a workspace) in that home.
As is usually the case in tax matters, the rules
differ for employed taxpayers and for the selfemployed, as the latter enjoy a greater degree
of latitude in the deductions which may be
claimed. That said, both the employed and the
self-employed must meet the same basic twopart test in order to be eligible to deduct homerelated expenses, and that test is as follows:
•
the home office must be the place at which
the taxpayer principally (defined by the
CRA as more than 50% of the time) performs the duties of employment or must be
the taxpayer’s principal place of business: or
•
the home office must be both used exclusively for the purpose of earning income
from employment or from the business and
must be used on a regular and continuing
basis for meeting customers or clients of
the employer or the business.
A self-employed homeowner who meets these
criteria is entitled to claim expenses such as
property taxes, rent or mortgage interest (but
not mortgage principal amounts), insurance,
utilities costs, etc. However, such expenses
are not deductible in their entirety; rather, the
homeowner must apportion the expenses based
on the percentage of the total space which
is one further caveat, in that the amount of
home office expenses claimed in a year cannot
be greater than the amount of income from
the business. It’s not, in other words, possible
to run a business which produces $5,000 in
income for the year and to then claim $10,000
in home office expenses relating to that business. However, where home office expenses
exceed business income in any given year, the
excess expenses can be carried over and claimed
in a subsequent year in which there is sufficient
business income to offset those expenses.
Employed homeowners who meet the two-part
test set out above must meet a further condition before being eligible to claim home office
expenses, as follows:
•
the employer must provide the employee
with a specified form (Form T2200), which
indicates that the employee is required by
his or her contract of employment to provide a home office and to pay for expenses
related to the home office;
•
the employee must not have been reimbursed
by the employer for such expenses; and
•
the expenses must have been used directly
in the employee’s work at home.
Once the required form has been issued, and
the other conditions are met, an employee who
owns his or her own home can claim a proportionate percentage of utilities and maintenance
costs. An employee is not, however, entitled to
claim any portion of mortgage interest, property
taxes, or home insurance costs paid, and cannot
claim capital cost allowance on the home.
is used as a home office. For example, a selfemployed taxpayer whose home office takes up
15% of available floor space and who incurs
$2,000 each year in qualifying expenses would
be entitled to deduct $300 ($2,000 times 15%)
in home office expenses for that year. There
Employees working on commission, who
usually occupy the tax territory somewhere in
between employees and the self-employed, have
slightly more latitude in claiming deductions
with respect to the use of their own homes
for work purposes. Such employees must also
provide a Form T2200, but may claim, in addition to the costs outlined above for employees,
a portion of property taxes and insurance paid
on the home. Mortgage interest and capital cost
allowance remain non-deductible.
As is the case with self-employed taxpayers,
an employee’s deduction for home office expenses cannot be greater than the income from
employment income for the year to which the
expenses relate. And, once again, carryover to a
subsequent taxation year is allowed.
Claiming capital cost allowance on the
family home
One of the tax benefits which is commonly
supposed to exist for homeowners who have
a home office is the right to claim depreciation (or capital cost allowance (CCA), in tax
parlance) on one’s home for tax purposes.
For employees (including those who work on
commission), however, such a claim is simply
not allowed. And, while the self-employed may
be entitled to claim CCA on a home, making
such a claim can create a short-term benefit
with long-term costs. Making a CCA claim on
one’s home is likely to erode the principal residence exemption from capital gains tax which
is claimable when a home is sold, and that
exemption is almost always more valuable, in
monetary and tax terms, than any CCA claim
which might have been made.
Accessing the equity in your home
For much of the time during which you own
a home, the focus is on keeping the mortgage
paid and on building equity. However, there
comes a time, usually after retirement, when
the need to tap into that equity can arise.
For many Canadians, a home is the single
most valuable asset that they will ever own. It
is also likely their most illiquid asset—while
they may have a great deal of equity in the
home, the problem is getting access to that
equity without having to sell the property and
move. As well, for the majority of taxpayers
who do not belong to an employer-sponsored
pension plan, the equity built up in their home
represents a significant potential source of
retirement income. Such taxpayers can find
themselves, after retirement, faced with the
difficult reality of having to sell the family
home and move, in order to free up capital
which will provide needed income.
As the Canadian population ages, more and
more Canadians will find themselves in that
position and, consequently, financial products
have been devised in recent years which will
permit homeowners to access their equity without selling the home. The most well-known of
those is the reverse mortgage.
In basic terms, a reverse mortgage is a loan,
usually available to taxpayers 60 years of age
and older, which is secured by the taxpayer’s
equity in his or her home, and on which interest is charged and accumulates. The amount
of the loan is usually between 10% and 40%
of the home’s value and, unlike a conventional
mortgage, no payments are required on the
reverse mortgage as long as the homeowner
continues to occupy the home. Payments
received under a reverse mortgage are tax-free
and don’t affect the homeowner’s eligibility for
means-tested government benefits, such as Old
Age Security or Guaranteed Income Supplement or tax credits like the goods and services
tax credit. On the downside, interest rates
charged under a reverse mortgage are usually
higher than those levied for a conventional
mortgage, and other related fees (home appraisal, application fee, legal fees) can also add
up. The taxpayer’s equity in his or her home is
reduced, not just by the amount of the reverse
mortgage, but by the accumulating interest
cost over the life of that mortgage. A reverse
mortgage can provide real benefits to the taxpayer who is “house-rich” but “cash-poor” (for
instance, someone who lacks a regular source
of income sufficient to ensure a comfortable
retirement but whose home has increased very
significantly in value since its purchase, perhaps decades earlier). Reverse mortgages are,
however, complex financial instruments, and
anyone contemplating acquiring one should
obtain professional advice from an independent third party. There are also alternatives to
taking out a reverse mortgage, each with its
own advantages and disadvantages.
Where a homeowner has a substantial amount
of equity in his or her home, a home equity
line of credit (HELOC) can usually be obtained. Like the reverse mortgage, the HELOC
M925-4-10
allows a homeowner to borrow funds secured by
the equity in the home. The maximum amount
which can be obtained through a HELOC is
usually calculated as a percentage of the amount
of equity held in the home, but it’s not necessary
to obtain such funds as a lump sum. Rather,
the homeowner can obtain funds through the
HELOC as they are needed – perhaps to meet
large recurring annual costs like property taxes
or unexpected costs for home repairs or medical
care, with interest payable only on the amount
which is currently outstanding. However, unlike a reverse mortgage, the terms of a HELOC
require regular (usually monthly) repayment of
amounts borrowed. In many cases, the minimum monthly payment required is the amount
of any interest cost incurred during the previous
month, so that the homeowner has the option of
making interest-only payments. However, where
the interest rate on a HELOC is tied to the current prime rate (which is often the case), those
who have borrowed through a HELOC are vulnerable to increases in prevailing interest rates.
The choice of whether to access one’s equity
through a reverse mortgage or through a HELOC
is a very individual one, which depends to a great
degree on the taxpayer’s individual circumstances.
The only hard and fast rule which applies is the
need to fully understand all of the terms and conditions of any lending arrangement entered into.
Finally, for the taxpayer who has a need to
access the equity in his or her home, borrowing to get that access isn’t always the answer.
While in some cases, the homeowner may
simply not be willing to sell and move from
the family home, in others it may be that the
homeowner needs access to the equity and also
finds the family home too expensive or difficult to maintain, but doesn’t want to give up
independent living. In such circumstances, the
answer may be to sell and move to a smaller,
less expensive home, or to a condominium,
solving both problems without a need to go
into debt. The answer, as in all such cases,
depends on the needs and circumstances of the
individual homeowner.
Renting or selling the family home
Renting the family home
While a principal residence is most often occupied only by the family which owns it, it is
sometimes the case that the need or the opportunity to rent out the family home arises—
most often where a temporary work transfer
or assignment requires a short-term move to
another location. Such a change in use could
have a number of negative tax consequences,
but there is a special election which may be
made to prevent those results.
M925-4-10
In effect, when a principal residence is changed
to a rental property, the owner can make
an election to not be considered to be using
the home as a rental property. In effect, the
property can continue to be designated as the
taxpayer’s principal residence for up to four
years while it is being rented out, as long as the
owner does not designate another property as
his or her principal residence during that time.
In order to take advantage of this election, the
owner of the property must report as income
any net rental or business income earned on the
principal residence and, in addition, may not
claim any capital cost allowance on the property.
The election itself is made by attaching a signed
letter to one’s return, describing the property,
and indicating that an election under section
45(2) of the Income Tax Act is being made.
While the election is normally available for a
four-year period, there are circumstances in
which that four year limit can be extended indefinitely. In order to do so, all of the following
conditions must be met:
•
•
•
•
you live away from your principal residence because your employer, or your
spouse’s or common-law partner’s employer, wants you to relocate;
you and your spouse or common-law partner are not related to the employer;
you return to your original home while
you or your spouse or common-law partner are still with the same employer, or before the end of the year following the year
in which this employment ends, or you die
during the term of employment; and
your original home is at least 40 kilometres (by the shortest public route) farther
than your temporary residence from your,
or your spouse’s or common-law partner’s,
new place of employment.
When it’s time to sell—the principal
residence exemption
used to finance one’s retirement. Our tax system recognizes these realities by providing an
exemption from the tax which would normally
be imposed on the sale of such an asset, by
means of the “principal residence exemption”.
Under the usual tax rules, where a taxpayer
sells an asset, the sale proceeds received, minus
the original cost of the asset, constitutes a
capital gain. One-half of that amount, known
as a taxable capital gain is included in the
taxpayer’s income for the year in which the sale
takes place. It’s easy to see how the tax bite on
such a taxable capital gain could significantly
erode the net proceeds available to the taxpayer
to use for other purposes. However, an exemption from capital gains tax is provided for each
year in which the property was occupied as a
“principal residence”. While there is a specific definition of what constitutes a principal
residence, it’s safe to say that any residence occupied as a family home throughout the period
of ownership would fully qualify as a principal
residence and the profit made from its sale
would be effectively exempt from tax.
Conclusion
Buying one’s first home and taking on a mortgage represents a huge financial commitment
and also, perhaps, the first big step into “adult”
responsibilities. There are many decisions to be
made in the course of buying and financing a
first home, and many of those decisions will
have a long-term impact on the homeowner’s
lifestyle and finances. It’s worth taking the
time to become educated about the financial
and tax implications of home ownership, and
to make certain that any tax “breaks” or benefits that are available—on the purchase of the
home, during the period of home ownership
and on the sale of that home—are utilized to
the homeowner’s best advantage.
Most of us will, eventually, be in the position
of selling a family home, and the proceeds
from that sale will likely be the largest sum of
money we ever receive on a single transaction.
For many taxpayers, as well, the money tied
up in a family home represents an asset to be
M925-4-10
Powered by TCPDF (www.tcpdf.org)